Of all the internal and external market forces that affect the way small businesses operate, inflation arguably has the most significant impact. The past few years have seen inflation rocket, spiking to a 5.4% year-on-year high amid various intensifying pressures.
With inflation directly impacting a business’s cash flow, small business owners need to have a thorough understanding of how it may influence their venture and find smart ways to mitigate the financial consequences.
The unfortunate reality is that inflation is notoriously insidious – “inflation creep” refers to a gradual and sustained increase in the general price levels of goods and services in an economy over time. In this way, it erodes the purchasing power of the rand, impacting consumers’ ability to buy goods and services with the same amount of money. It’s, therefore, often only in retrospect (and over a long period) that consumers realise just how much inflation has impacted their pocket.
Inflation and what it means for small businesses
Unfortunately, when consumers feel the pinch, so do small businesses. Reduced buying power can have a direct impact on the profitability and the ability of small and medium-sized enterprises (SME) to generate revenue. Furthermore, when there is a general rise in the cost of goods and services; including raw materials, utilities and labour, small businesses that rely on the inputs might face higher operating expenses.
High inflation is usually followed by rising interest rates as governments attempt to manage it. This has certainly been the case in South Africa, with the SA Reserve Bank implementing a series of consecutive interest rate hikes over the past few years.
For businesses with loans or lines of credit, higher interest rates mean increased borrowing costs. Under the conditions, small businesses might find it more expensive to finance their operations, fund their expansion, or make capital investments.
Apart from the direct impacts caused by inflation, there are also wage pressures to consider. In high inflationary climates, businesses may face demands for higher pay and increased labour costs, particularly in industries where competition for skilled labour is high. In the scenarios, small businesses are pitted against their larger counterparts, which may have greater capacity to absorb the increasing costs and compete for rare skills.
However, while inflation presents undeniable hurdles for small businesses, by tackling the challenge head-on and being proactive about implementing inflation-proof measures, small businesses can minimise the impact that inflation has on their bottom line and even grow and improve their offering.
Three ways in which to future-proof your business against the invisible force of inflation:
Pivoting to e-commerce as a main driver of revenue, or adding it to your sales channels, may well be the answer to building a more resilient business.
Given that 50% of South African consumers shop online; with the figure being predicted to increase to 60% by 2027, e-commerce holds the key to future business expansion.
The beauty of e-commerce lies in its capacity to transform businesses into 24/7 operations – the digital realm operates without time constraints, providing an always-on avenue for sales and revenue generation. Furthermore, by establishing a digital store front, companies can transcend the limitations of traditional brick-and-mortar operations, reaching a broader audience and tapping into new markets.
Get your pricing right
When inflation hits, it may be time to review your pricing strategy. The key lies in striking a delicate balance between maintaining profitability and offering real value to customers.
Small businesses may consider implementing tiered pricing models, introducing bundled offerings or exploring loyalty programmes to optimise customer retention. An important factor to consider is how changes in prices are communicated to customers. Open and transparent communication about price adjustments can go a long way in building trust and encouraging loyalty among customers.
Pricing has the ability to make or break your business. For this reason, it is one aspect that needs to be under constant scrutiny and review. Look to your competitors for benchmarks on what is being charged in your industry for a particular product or service. It may even be worthwhile consulting a business analyst for advice on how to price your offering competitively, without compromising on your business’s profitability.
Another key focal point for SMEs in times of high inflation is operational efficiency. Making sure that your business is running its operations in the most time- and cost-effective way possible should be a strategic imperative, especially during times of economic volatility.
Streamlining internal processes, optimising supply chain logistics and integrating digital tools for automation can significantly enhance operational efficiency. Employing lean principles also allows businesses to cut unnecessary costs and enhance productivity. Investing in technology solutions that improve workflow management, inventory control and customer relationship management can also yield long-term benefits.
Taking a close look at your rate of efficiency and making the necessary adjustments can help insulate your business from the impact of rising costs. In the long-term, this proactive approach will safeguard your bottom line and lay the groundwork for sustained resilience and consistent growth.
Ben Bierman is the managing director of Business Partners.